How do you feel when stocks go down?
Do you breathe a sigh of relief, because you are glad to have missed the day’s losses?
Or do you feel your heart start to pound, as visions of financial ruin fill your mind?
In truth, either reaction can be appropriate, depending on your situation and the size of the market drop you experienced.
It’s important to think carefully about what stocks going down means to you so that you can take action accordingly.
When you’re in the midst of a stock market crash, it can be easy to panic and want to sell everything immediately.
But you can take steps to ensure that you keep your portfolio balanced, even when the market goes down.
Read on to learn about how stocks go down and what you should do when they do.
Why shouldn’t you panic when stocks go down?
Panic is a natural reaction in situations where we have no control.
When stocks go down, you don’t have that same kind of panic because there are concrete steps you can take to increase your chances of recouping your losses.
The first thing you should do when stock prices fall is to remain calm and try not to worry about it.
Panicking will only add more stress to an already stressful situation, which will make it even harder for you to make rational decisions about how to handle your investments.
People who panic sell during a crisis often regret their choice.
What is a stock market crash?
According to Investopedia, a stock market crash is the sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of value in stocks.
Add to that, it is important to distinguish between stock market crashes and bear markets because they are different.
Stock market crashes are often followed by economic recessions while bear markets are often followed by longer periods of stagnation or even growth.
Over time, countries have recovered from almost every kind of financial crisis, whether caused by stock market crashes or not.
If your portfolio takes a hit during a crash, there’s no need to freak out.
What to do when stocks go down?
Sometimes stocks go down because of events that are outside your control.
In 2008 and 2009, for example, stock markets around the world fell due to a banking crisis.
However, you can take steps to limit market downturns—both when it’s possible to anticipate them and when you don’t see them coming.
Avoiding losses is easier than making gains: When stocks go down, your first instinct might be to sell your investments immediately to lock in your losses.
However, studies show that most investors do better if they hold onto their investments instead of selling during a downturn.
First, take a deep breath and relax your body. Second, check out the checklist below to help you understand what to do when stocks go down.
1) Be ready to buy the dip
This is a basic rule of investing: When stocks go down in value, you should buy.
There’s an old Wall Street saying about how stocks behave when they go down: The trend is your friend.
This means that when stocks go down from one day to another, history shows us that they usually bounce back up again over time.
That’s why experts say it’s a good idea to buy more stocks if their prices fall.
A falling market can also be a buying opportunity.
If you buy the dip, you probably won’t grab the stock at the lows, but that’s okay.
The key is to be opportunistic about investments that you think have good long-term potential.
Investing is not all about waiting for a dip, though. It’s also important to have a sound strategy and never invest based on what other people are doing.
Don’t let panic-inducing headlines make you do anything stupid either.
Trust in your investments!
Stock markets go up and down all of the time; it’s all part of how they work.
Be ready to buy when stocks go down if you want to improve your chances of getting solid returns over time.
2) Resist any urge to sell stocks
It’s human nature to panic when we see stocks go down.
But if you think about it rationally and remove emotion from your equation, you’ll realize that selling a stock at a loss is one of the worst moves an investor can make.
Why?
Because to buy stocks back at a later date, you have to pay more than what you sold them for.
Besides, if you think you can cash out immediately and then re-cash when the market improves, consider this: you have no way of knowing when the market will bounce back.
Even missing a few really good days in the stock market can cost a lot.
3) Focus on the long term
When stocks go down, it’s tempting to panic and sell.
Historically though, that tends to be a bad decision in the long run.
Sure you might make a quick buck (or 2 or 3) by selling when stocks go down but historically it doesn’t work out well for investors who focus on building wealth for long-term goals like retirement.
When your investment horizon is measured in decades, not months or weeks, it’s important to see stock market volatility as an opportunity rather than a threat; don’t make impulsive decisions based on market news flashes!
If you have a portfolio of mutual funds with different asset allocations, use downturns to reallocate more of your portfolio into fixed-income investments which will generally do better during periods of stock market volatility.
That way if stocks go down, they won’t eat up all of your portfolio value.
Remember: while no one can predict exactly how much stocks will move up or down at any given time, over time stocks tend to appreciate over other investments like bonds or cash equivalents.
Tips for how to act when stock go down
Stock market crashes are inevitable.
History tells us that major stock market downturns have occurred every 20 to 25 years since 1929.
So what should you do when stocks go down?
If your investment horizon is long-term and you plan to buy and hold stocks for at least five years, it’s best to sit tight and ride out any stock market declines.
Don’t sell your stock after a crash unless you need the cash immediately (in which case you probably shouldn’t be in the stock market in the first place).
Best to sit still and wait patiently.
If you have money to invest, buying stocks at bargain prices during a recession can be a smart long-term move.
After things cool off, take the time to review your investments and make adjustments to rebalance your asset allocation.
